Energy is what the political economist Simon Bromley called a “strategic commodity”. In other words, a state that controls access to it has power over other states. Bromley was thinking mainly about oil, but these days natural gas is very evidently a strategic commodity.
Its price has been rising fast—most spectacularly in Europe, where it has gone up fivefold in the past few months. Hence the acute squeeze energy companies, consumers, and industry are suffering in Britain.
But the problem is global. The recovery in the world economy from the recession precipitated by the pandemic has pushed demand up faster than supply.
Meanwhile, a cold winter and disappointing summer depleted stocks. Longer term, Asian demand for gas has risen 50 percent in the past decade. This is driven by the Chinese government’s hesitant steps toward cutting the economy’s reliance on coal. Coal fired power stations generate 70 percent of China’s electricity.
Europe is particularly vulnerable because of its increasing dependence on imported gas. Britain, its own energy reserves declining, shares this dependence. But deregulation of energy markets here has made it even more vulnerable.
The Financial Times’ Alphaville column explains that deregulation drove “consumer prices down relative to wholesale costs by increasing competition from the incumbent Big Six players to as many as 70 organisations.”
“Many of these new providers were happy to gain market share by undercutting rivals and offering below-cost deals to consumers,” it adds. “Many were also asset-light businesses that did not have infrastructure of their own, giving them another big advantage. Others were less attuned to hedging their market-based exposures than more experienced operators.”
Rather than build up reserves or secure supplies through long-term contracts, many energy firms relied on the spot market for their gas. Here it is supplied at the price prevailing when the purchase is agreed.
It is the sharp rise in the spot price that has sent many British energy firms toppling like ninepins. The European Union (EU) has also switched to buying gas on the spot market in recent years.
If Europe is weakened by the natural gas price explosion, Russia, its main supplier, is strengthened. Prices seesawed on Wednesday last week—first rising sharply and then dropping back when president Vladimir Putin said Russia could help improve gas supplies to Europe.
Experts differ over whether Russia has the gas to spare. But if it does, it would come with a price tag.
Other Russian officials dropped heavy hints that their help would come quickly if EU regulators speedily approved the Nord Stream 2 project to send Russian gas westwards. The new pipeline bypasses Ukraine, where Putin has been waging a low-intensity war for nearly a decade.
The United States denounced Nord Stream 2 as a capitulation to Putin, though Joe Biden later dropped his opposition to keep the EU sweet.
As it is now the world’s biggest natural gas producer, the US itself is less vulnerable to the current energy squeeze. But gas prices have still doubled.
Financial Times columnist Robert Armstrong points out that capital investment in fossil fuel extraction has been falling since the mid-2010s. He writes, “Part of this is down to efforts to reduce carbon emissions. But decarbonisation is only part of the supply story. Another part of it is that the management of energy companies are listening to shareholders, and shareholders want capital returned to them, rather than invested in new projects.”
So fossil fuel investment is shrinking, partly because investors are cashing in on the shale gas revolution. Meanwhile, the feeble steps taken by governments towards developing renewable sources of energy can’t fill the resulting gap. The present squeeze could make these efforts go into reverse.
Thus in China the government has ordered coal producers to increase output and construct new mines. It allowed the import of Australian coal, which it had previously blocked.
Fossil capitalism can’t supply safe and reliable energy, but it won’t let go.
Not just a national struggle